Why minimum wages need to increase

May 22, 2014

Last month, the Senate blocked a bill that would have given low income workers a raise across the entire country. The reason they denied the raise to workers is because of a false narrative that is being repeated again and again by some uninformed and reckless media outlets.

While people across the country think raising the minimum wage would benefit the lives of workers, they have continually been told the outright lie that this policy would be devastating to our economy. People have been told this blatant untruth so often that even the Democratic lead Senate could not get the legislation passed. I am writing today to dispel a few rumors about the minimum wage.

First off, raising the minimum wage would not lead to mass layoffs. Some restructuring may occur, but if a small raise in the cost of labor causes a company to lay people off, odds are that the company was already in trouble and those layoffs would have come regardless of a change in wages. The truth of the matter is that our labor participation rate will likely rise rather than fall. The classical economic argument against a minimum wage is that business and labor have come together to find this magical number called the equilibrium, which workers are currently paid based on.

Theoretically, this wage is the highest wage that would sustain the greatest number of workers. This idea states that if a business provides a higher wage it won't be able to employ as many workers as it would like, and if the business sets the wage any lower then it won't be able to recruit the number of workers the business wants. The problem is that this model assumes a natural equilibrium, but the equilibrium we currently have is far from natural. It is an outdated minimum wage that has not been adjusted for naturally changing market forces.

The naysayers are basing their claims of disaster on this theory which was meant for analyzing the imposition of a minimum wage, not raising it to match the new equilibrium. Basically what this means is there are millions of people that are not working minimum wage jobs because they place a higher value on their time than what business is willing to pay. That is what economists call a deficit of labor, and the cure for this ailment of the system is raising wages. The fact that there is currently a deficit of labor, and no risk of a surplus which would lead to layoffs, is made evident by the vast number of minimum wage jobs available and large number of people available but not working them.

Another concern I hear a lot of is if the minimum wage goes up three dollars, that will turn the dollar menu into the four dollar menu. This is another misconception. Companies set their prices based on numerous factors and whether it is manufacturing or fast food, labor, especially unskilled labor, typically is no more than 10 percent to 30 percent of the cost associated with producing a good. Every company is different when it comes to how much labor accounts for the cost of a product, but using the highest of the averages above, 30 percent, raising the minimum wage from $7.25 to $10.10 would increase the cost of a dollar menu item only around 12 cents. Even if labor made up 100 percent of the cost of making a dollar menu item it would still only increase the cost of that item by $0.40. Of that $0.12 - $0.40 increase to the costs of production it's unclear how much, if any, would actually be passed on to consumers.

There are a lot of sources telling people all the made up problems that will result from raising the minimum wage, but they are not telling people all the good it will do. First, raising the minimum wage to $10.10 will save the government and taxpayers around $4.6 billion in the first year alone. Companies are able to pay their employees such a low wage because the government subsidizes the employees, and thereby the company, with benefit programs such as SNAP. By forcing the company to pay their workers a closer number to a living wage, the government would be able to cut back on the subsidies it provides. A second benefit that will be seen immediately is the boost that it will bring to the economy. Unlike their employers, minimum wage workers cannot typically afford to have a savings account. This means that, if given any increase to their wages, all of that money will be put directly back into the economy through the purchase of goods. The last benefit I will discuss, but far from the last benefit that will occur, has to do with the labor market I spoke of above. If the currently unemployed, or even those out of the market, are given an option where they at least have a chance of making ends meet, the country will see a huge influx of workers returning to the labor force, and thereby boosting our economy even further.

If this were any other economic issue I would have started by saying, "I have a Master's degree in Economics, listen to me, I know what I am talking about." But when it comes to raising the minimum wage and all the benefits that will come, these arguments are common sense. You do not need any degree in economics to understand that when people earn more money their quality of life goes up, and our economy does better. You also don't need to be a business owner to know that businesses make their money off the backs of employees, and when you pay those employees a decent wage productivity and profits go up. Raising the minimum wage will give people a chance to live a better life while lowering the tax burden for all Americans. Politicians need to stop politicking and start working for the people.

Jim O'Donnell is a candidate for New York state's 27th Congressional District, which includes a portion of Cattaraugus and Erie counties.